In 1920, an Italian immigrant tricked thousands of New England residents into investing in a postage stamp speculation scheme. He promised that he could provide a 50 percent return in 90 days. He’d use funds from follow up investors to pay off earlier ones to create the illusion of a legitimate business. At the height of his scam, he raked in about $3 million a day in today’s money.

When he was caught, this kind of fraud was named after him as a Ponzi scheme.

You would not fall for a Ponzi scheme – would you?

Let’s put that to the test.

What’s the biggest and most famous investment opportunity everyone talks about those days? Right, the IPO of 5% of the National Oil company of Saudi Arabia, Saudi Aramco. And for quite a while now, we have been exposed to all sorts of numbers shooting for superlatives.

The biggest company. The biggest IPO. The biggest bonuses. This is the mother of investment opportunities.

But those numbers – how solid are they? Can we trust them?

Saudi Aramco has existed – in one form or another – for more than half a century and has generated enough profits to make Saudi Arabia one of the wet dreams of anyone hoping to strike it rich.

Arabian princes were not known for their fabulous riches just 100 years ago but rather for desert, camels and wild Lawrence of Arabia style romanticism. Today, an Arabian prince conjures images of golden bathrooms in private jets the size of airliners and private zoos.

All this because of one company. That’s the kind of stuff that makes anyone extremely unwilling to ask hard questions. If history is any guide, this will the biggest payday ever.

Ponzi pulled off his scheme in a matter of mere months. Not because he did not want it to continue but because it took less than a year to bring him to justice as he ran out of other peoples money. Ponzi was schemer who planned to fraudulently remove his investors from their money.

A National Oil Company (NOC) like Saudi Aramco is a very different beast.

Most of the Saudi legacy oil fields are many decades old. The biggest – and most famous of all of them – Al Ghawar – clocks a more than 80-year history as a producing oil field. Yes, its a once in a lifetime field of unimaginable proportions. Oil production volume from Al Ghawar alone puts entire OPEC member countries to shame.

But no matter how big this field is, pumping oil at this level for so many decades cannot have happened without consequences. This means that reserve figures from Saudi Arabia must be taken with a truckload of salt. The same is true for production cost figures.

This is important because if the world came to believe that there is either less oil still left in the sands or that producing this oil is more expensive than expected or both, that would have a major impact on the future profitability of the company. And at a time when shale oil upends the equation for all drillers worldwide while at the same time cash supply in countries like Saudi Arabia has gone from limitless to finite, this is potent stuff.

So, there is a clique of evil persons that make anyone believe that the company is worth more than it really is?

Not so fast.

Any hierarchically organized group of people that is more than a certain minimum threshold (I like to put this at 50 persons) automatically becomes political. Instead of doing the job they are supposed to do, people start to hide inside the group and shun responsibilities, skip work and game the organization.

That’s a natural process that cannot be stopped. And it happens in any culture, in any country, in any age group, wherever you look.

When people make mistakes (and there are always mistakes), they naturally tend to hide them or blame someone else who then tries to hide them, play them down, window dress and make things appear slightly better than they really are. It’s not the data, its what light you shine on it.

This is an accretion process that builds up liabilities and fake data until the organization starts to feel its effects in ways that make survival a possibility, not a certainty.

In other words, shit has stacked up to a point where the company is in serious trouble. Again, this is a very general process that all organizations are suffering from.

This is usually the moment where new management comes in, cuts the slack, reorganizes, puts the company through drastic reorganization, maybe even bankruptcy proceedings, whatever required in order to remediate the problem. In extreme cases, the organization is liquidated which resolves the problem for society.

Public administrations have those mechanisms too albeit they work a little different as liquidating them is not really a prospect. The result is the same.

Things are put in question, a bright light is shone on problems and some things get changed to the point where the original problem is either resolved or diminished enough so survival is assured.

Smaller and/or more entrepreneurially structured organizations are usually better with cleaning up their own mess.

Not so in National Oil companies and certainly never in big cash cows like Saudi Aramco.

Those organizations never need to worry about the skeletons in the cupboard as endless cash flow always puts a thick layer of muck over any problem or issue the company may have. Flow rates are not as good as they need to be in order to trigger bonus payments, they are prettied up. Reserve figures are pimped for decades and production cost gets artificially trimmed in order to fit whatever financial model they need to fit.

It starts with the smallest employee who wants to be sure he gets his sliver in the spoils and deflects blame and it goes up to the CEO and further. Nobody wants to know the reality. External companies chip in and play the game as they don’t want to lose the customer/partner.

In the end, nobody knows what’s real and what not. In order to get a sense of reality, one would have to disregard everything that was reported and archived in the past and start from scratch. All pre-existing information must be assumed tainted to the point where it’s unusable.

But that won’t happen – as even those who want to invest in the Saudi Aramco IPO are not interested in reality. They want their figures and they want their bonuses for having thrown money at something that has all the hallmarks of a superstar investment. Those making the decisions are not those investing their money. They just take a gamble.

And they need something they can blame when things go awry. In an ideal world, its the one who takes a decision. However, this is what we have thrown in the scientific method for. As soon as there is some form of formula that can be applied, it makes the decisions. Sure enough, the formula is tweaked so it gives us the results we seek. Its always humans that take the real decisions in the end but the subterfuge will hold for them.

What we really want is deniability. To be able to say: “Its not my fault”. Here is whats to blame. Don’t look at me.

It was the model, the data – until it was not anymore and everything crashes to pieces.

Because even the resulting data needs interpretation. And this interpretation is then a judgment call – or an opinion if you will. But we mask those opinions as hard, not to be argued with data. We are back full circle – it’s not the machine – it’s us. But we can always pretend it was the machine and that’s just fine for us.

This is the first article in a 3 part series. Don’t miss the sequel next week.

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